In this article, we will be reviewing the changes made by Securities and Exchange Board of India (‘SEBI’) in the related party transaction (‘RPT’) regime for listed entities. On 9 November 2021, SEBI issued the SEBI (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2021 (‘Amendment Regulations’), vide which several material changes have been made in the corporate governance regime pertaining to RPT disclosures and approvals for listed entities. SEBI has also issued a Circular dated 22 November 2021 (‘Circular’) to prescribe the information to be placed before the audit committee and shareholders for approval of RPTs.
Amendment to the definition of related party
Previously, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’) prescribed that a promoter or promoter group would be deemed a related party only when such entity held more than 20% shareholding in the listed entity. This position is set to change with these Amendment Regulations. With effect from 1 April 2022, any individual or entity forming part of the promoter or promoter group of the listed entity, irrespective of shareholding, shall be deemed to be a related party.
Further, any person or entity holding more than 20% equity shares in the listed entity either directly or on a beneficial interest (as per Section 89 of the Companies Act, 2013) basis in the previous financial year would also be deemed as a related party w.e.f. 1 April 2022. The threshold is set to be lowered to 10% w.e.f. 1 April 2023.
Amendment to definition of RPT
The Amendment Regulations have significantly widened the ambit of RPT. Where previously, an RPT meant a transaction between just the listed entity and its related party, the scope has now been expanded to include transactions between a listed entity or its subsidiaries on one side and a related party of the listed entity or its subsidiaries on the other side. These thus, now covers transactions between listed company and its subsidiary’s RPT as well as transactions between a listed company’s subsidiary and a related party of the listed company.
With effect from 1 April 2023, an RPT would also include transactions by a listed entity or its subsidiary with any other party which has the purpose and effect of benefiting a related party of the listed entity or its subsidiary. With this change, transactions which are prima facie not undertaken with a related party of the entity would still require disclosure and approval if the transaction has the effect of benefiting a related party of the listed entity.
Transactions not considered to be RPT
Vide these Amendment Regulations, certain transactions have been excluded from the purview of RPT. Proviso to the definition of RPT provides that transactions of issue of specified securities on a preferential basis, as per SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018, uniform offers to all shareholders of dividend, subdivision or consolidation of securities, rights issue or bonus issue or buy-back of shares shall not be treated to be RPT. Acceptance of deposits by banks/non-banking finance companies has also been clarified as not a RPT, subject to certain conditions.
Material related party transaction
The ambit of a material RPT has also been modified with the Amendment Regulations. Previously, transactions exceeding 10 per cent of the consolidated annual turnover of the listed entity were treated as material transactions. As per the Amendment Regulations, transactions exceeding INR 1,000 crore will be considered as a material related party transaction.
Increased scope of Audit Committee approval
The Audit Committee now has the additional obligation to define ‘material modification’ and disclose it as a part of the policy on materiality of RPT.
Further, the Audit Committee is required to approve RPT where subsidiary company is involved, and the listed company is not. It shall also require approval of the audit committee, if the value of transaction, or multiple transactions taken together in a financial year exceeds 10% of the annual consolidated turnover, as per the last audited financials of the listed company. This threshold is set to change to 10% of the standalone turnover of the listed company from 1 April 2023.
The only exception to the approvals is if there is a transaction between a listed subsidiary and RPT, or between two subsidiaries of listed companies whose books are consolidated, or whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.
Changes brought in pursuant to the Circular
The listed entities must now provide the details of loans, deposits and inter-corporate deposits made along with the purpose for which the funds will be utilized by the ultimate beneficiary to the audit committee and shareholders at the time of consideration of the RPT.
Further, the listed entity must also provide a justification of how the RPT being considered is in the interests of the listed entity.
Considering that RPTs would now include transactions by listed entities with third-parties which may have the effect of benefiting a related party, it may become cumbersome to provide a justification as to how such a transaction would be in the interests of the listed entity.
Concluding remarks
SEBI has brought in wide changes to the RPT regime under the LODR Regulations to plug the loopholes it has observed over the past few years. It remains to be seen how listed entities will cope with the increased approval and disclosure requirements and the secretarial compliances that will follow.
What is interesting to note is that while SEBI has deemed all transactions with third-parties which have the purpose and effect of benefitting a related party as an RPT, there is no clear guidance on what this test of purpose and effect would entail. This confusion is expected to be clarified by SEBI in future circulars.
With the Amendment Regulations in place, all transactions of listed companies and their subsidiaries shall be under the scanner. Further, listed companies along with their subsidiaries shall have to be agile with respect to dealing with parties that may be related parties to either of the company. While the amendments are viewed as a positive step towards minority rights and good corporate governance, they have significantly increased compliance on the part of listed companies and their subsidiaries and the audit committees of these companies.
[The authors are Associate and Principal Associate, respectively, in the Corporate and M&A advisory practice in Lakshmikumaran & Sridharan Attorneys, Mumbai]
